There is considerable disquiet over certain provisions of the Financial Resolution and Deposit Insurance (FRDI) Bill, likely to be moved before the Winter Session of the Parliament. Social media is agog with sarcastic jibes about the government dipping into the cookie jar of peoples’ savings to bail out failing banks. So far, people have reposed their trust in public sector banks. Legally, the 1961 Deposit Insurance Act protects deposits upto Rs 1 lakh in case a bank fails. What has propped up the banking system is the perception that India’s semi-socialist system will not allow banks to fail. Either a bail-out through recapitalisation or merger with a stronger bank is always at hand.
The government, faced with tottering state-owned banks needing recapitalisation of over Rs 4 lakh crore, is not willing to put in any more money. Instead of ‘bail-outs’, the new Bill has a set of ‘bail-in’ clauses which allow banks to use depositor monies to tide over a crisis.
A Resolution Corporation proposed under the Act can cancel the contractual obligations of banks and lock in deposits by shifting them to Fixed Deposits (FDs) without consent. In extreme situations, a bank will not be held liable if it does not fulfil its contracts; people may lose their money if the bank sinks as happened in Cyprus in 2013.
Despite assurances by Finance Minister Arun Jaitley, these provisions could not have come at a worse time. With demonetisation, public confidence in the banking system has taken a huge knock. Now with the FRDI Bill removing guarantees protecting bank deposits, the very foundation of state-owned banks may shatter. Studies have shown that people, especially pensioners, still park their savings in FDs in preference to mutual funds, company shares or property holdings.
This money may move to other parking lots, further hobbling banks. It is also ironical that a government pledging to end the ‘cash economy’ and boost digital transactions is taking steps which might drive money away from banks into the ‘black’ economy.